The past year brought a range of challenges to industries across the globe. From remote work to rolling supply chain disruptions, the implications of a global pandemic are still being felt, often in surprising ways. Nobody could have predicted that a shortage of semiconductors would bring about major change in the automotive industry, but the best businesses thrive in times of uncertainty, using agility and innovation to race ahead.
As workers were sent home from offices, and schools began teaching remotely, consumers required more electronic devices — and fast. “There has been unprecedented demand for personal computers and peripherals,” says Patrick Moorhead, a founder of Moor Insights.
The upshot of this surge in demand has meant a global shortage of semiconductors, affecting industries from smartphones to automobiles. “There’s a serious imbalance in supply and demand of chips in the IT sector globally,” says Koh Dong-jin, co-chief executive at Samsung.
Semiconductor supply chains typically lack resilience because foundries have high running costs. Modern factories have worked on a lean model of production to keep costs down. As COVID turned people indoors, it caused a simultaneous drop in demand for automobiles and rise in demand for personal electronics. As car manufacturers slowed their output, semiconductor producers pivoted toward other industries to move units. Now that the automobile industry is attempting to shift up a gear, there simply aren’t enough semiconductors to fit under the hood.
Potential solutions
In the short term, automotive manufacturers have been responding to the semiconductor shortage by pausing production. Across Ford factories in Ohio and Kentucky, things have either ceased entirely or slowed to a small handful of shifts a week. Ford is also taking the unique approach of making certain trucks without semiconductor components, hoping to add these parts at a later date. “The global semiconductor shortage ... is prompting Ford to build F-150 trucks and Edge SUVs in North America without certain parts, including some electronic modules that contain scarce semiconductors,” according to a recent Ford press release.
These short-term solutions are based on the hope that the semiconductor supply chain will stabilize in the near future. However, tech blogger Kristy Walker writes, “Fundamental shifts have taken place in the semiconductor supply chain. It’s likely that semiconductor shortages will outlast 2021 and potentially lead to continued supply chain disruption in 2022.”
Automotive supply chain leaders must take this opportunity to enact long-term strategies for resilience. Scott Vazin, a spokesperson at Toyota, states, “We are evaluating the supply constraint of semiconductors and developing countermeasures to minimize the impact to production.” These countermeasures must be based in building a multisource strategy of supply to ensure greater resilience in a climate of changed semiconductor demand.
The automotive industry can no longer dictate the terms of supply. Cultural and structural shifts need to take place in the semiconductor supply chain for things to return to production line norms. Short-term contracts for supply have proved ineffective in a volatile global market, so manufacturers are going to be forced to transition into longer-term relationships, building collaborative and coordinated supply chain partnerships. To some extent, this is a structural shift in economic power: The balance has shifted in favor of electronics manufacturers, and others must accept its new position.
Diversifying supply beyond the Asian-Pacific manufacturing theater could be vital for the automotive industry. “Traditionally, the auto industry has been positioned hierarchically and has often acted adversarially towards suppliers,” says business writer James Johnson. “We now have tangible market evidence that this position is unsustainable. Relationships with suppliers are going to be increasingly important if the auto industry is to refind its footing.”
Expect to see the automotive industry locking in longer-term contracts for components, semiconductors included, and working to build more cooperative relationships with equipment manufacturers in order to secure a global pool of supply.
This chip shortage isn’t ending any time soon. Fundamental changes have taken place in the supply chain and won’t revert to the norm in 2021. Automobile industries need long-term solutions, and innovation will drive cultural and structural shifts within the industry.
George J. Newton is a tech writer at Write My Coursework and PhD Kingdom. He gained a degree in chemical engineering before transitioning into journalism and science education. He also writes for Coursework Writer.
